Coca-Cola
KO
(NYSE: KO) recently reported its Q3 results, with revenues and earnings beating our estimates. KO stock is trading at 5.5x sales compared to the last five-year average of 6.8x, and we believe investors will likely be better off picking Coca-Cola for robust gains in the long run.
The company reported revenue of $12.0 billion, reflecting 8% growth from the prior year period and above our estimate of $11.5 billion. Its adjusted earnings of $0.74 per share were up 7% y-o-y and above our estimated $0.70 figure. In this note, we discuss Coca-Cola’s stock performance, key takeaways from its recent results, and valuation.
KO stock has seen little change, moving slightly from levels of $55 in early January 2021 to around $55 now, vs. an increase of about 10% for the S&P 500 over this roughly 3-year period. Overall, the performance of KO stock with respect to the index has been lackluster. Returns for the stock were 8% in 2021, 7% in 2022, and -12% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 9% in 2023 – indicating that KO underperformed the S&P in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector, including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could KO face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, KO stock looks like it has ample room for growth. We estimate Coca-Cola’s Valuation to be $67 per share, reflecting around 20% upside from its current levels of $56. Our forecast is based on a 25x P/E multiple for KO and expected earnings of $2.67 on a per-share and adjusted basis for the full year 2023. The 25x P/E aligns with the stock’s last four-year average. The company raised its earnings outlook to now be in the range of $2.65 and $2.68 (vs. the $2.60 and $2.63 range earlier).
Coca-Cola’s revenue of $12.0 billion in Q3 was up 8% y-o-y. Sales were up 11% organically, led by a 9% rise in price/mix and a 2% growth in concentrate sales. The company is seeing more traction in the away-from-home business than at-home beverages. Coca-Cola saw its adjusted operating margin expand 20 bps y-o-y to 29.7% in Q3, vs. 29.5% in the year-ago period. Higher revenues and margin expansion, partly offset by a slightly higher effective tax rate, led to a 7% y-o-y rise in the bottom line to $0.74 on a per-share and adjusted basis in Q3’23.
While KO stock looks like it has ample room for growth, it is helpful to see how Coca-Cola’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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